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Madoff account value must be determined at trial

The IRS is denied summary judgment on an estate’s valuation of its
account in an infamous Ponzi scheme.

Whether an account managed by Madoff Investments or its claimed
holdings are considered property included in a gross estate and
whether a willing buyer or seller of the account could reasonably know
or foresee before its collapse that the account was part of a Ponzi
scheme are disputed material facts that should be determined at trial,
the
Tax Court held. Accordingly, the court refused to grant summary
judgment to the IRS concerning the inclusion and valuation of the
account in a decedent’s gross estate.

Facts: Bernard Kessel was the sole participant in his
wholly owned corporation’s defined benefit pension plan, which held an
account in Madoff Investments. Kessel died on July 16, 2006, and,
using an appraisal based on a list of securities provided by Madoff
Investments, the estate's executrix valued the account at $4.8 million
on Kessel’s estate tax return. After Bernard Madoff’s arrest in 2008,
the estate filed an amended estate tax return, valuing the account at
zero and requesting a $1.9 million refund. The IRS denied the request
and, determining the value of Kessel’s estate had been underreported,
issued a notice of deficiency in estate tax. The estate petitioned the
Tax Court for relief. The estate and IRS agreed to stipulate to issues
other than the refund claim relating to the fair market value of the
Madoff account on the date of death, for which the IRS filed a motion
for partial summary judgment.

Issues: The Tax Court may grant a motion for summary
judgment only if it is shown that there is no genuine dispute as to
any material fact and its decision therefore is a matter of law. The
IRS argued that the Madoff account, rather than its claimed holdings,
was the property subject to estate tax and argued its valuation was
unaffected by the later collapse of the scheme because a willing buyer
or seller of such an account could not reasonably know or foresee that
it was part of a Ponzi scheme until its collapse, which occurred after
Kessel’s death.

Holding: The Tax Court denied the IRS’s request for
summary judgment because the two arguments made by the IRS, although
potentially correct, were based on genuinely disputed material facts
that needed to be determined at trial. First, it held that, although
the pension plan’s customer agreement with Madoff Investments had what
appeared to be property-like rights, it was unclear whether the
agreement was a property interest separate from the supposed assets in
the account. Secondly, because some people had viewed the pre-collapse
returns of Madoff Investments as too good to be true, it is possible
that information might have been considered by a willing buyer and
seller when determining the fair market value of the account,
according to the court.